Credit Crunch Takes a Bite Out of the Russian Bear

Pierre Cohade, president of Goodyear Tire & Rubber Co.’s Asia-Pacific business, recently asked if we should move away from talking about BRIC countries (the emerging markets of Brazil, Russia, India and China) and instead focus on BIIC. Posting this poser on the popular Twitter social network (follow twitter.com/tyrepress for regular tyre industry updates) from his base in Shanghai, Cohade questioned whether Russia’s position as leading light in the global economy should be replaced with Indonesia which, in his words “continues its spectacular improvements.” He’s got a point.

Taking into account the fact that Cohade is president of Goodyear’s Asia-Pacific business, you could be forgiven for thinking he is particular keen to praise the rising fortunes of nations on his patch. However, as the executive pointed out in an earlier post, Nigeria recently overtook Russia in the World Bank’s ease of doing business rankings. How low will Russia go, you might ask? For us however, the question is: what does this mean for tyre companies doing business with the great bear?

With the Russian economy fairing worst that most at the moment, the tyre business in this part of the world has taken a similarly significant hit, with both imports and exports falling heavily in the first half of 2009. Tyre manufacturers appear to have been offering significant discounts (or exporting lower value items) in the first half of 2009 with unit export figures falling far slower than export values. Data compiled by the Russian Discovery Research Group shows exports totalled 3,259,440 units in the first half of 2009, down 8.6 per cent from 3,566,469 units in the first half of 2008. Meanwhile, passenger-car tyre exports fell 7.1 per cent in the period, with truck tyre exports down 14.9 per cent. Exports of light truck tyres countered the trend, growing 40 per cent.

Looking at the Russian market broken down by value, the most striking figure is that tyre exports in the period fell 302 million rubles to 214.4 million rubles (approximately £4.434 million; 4.9 million euros; and US$7.362 million, according to current exchange rates). Dig a little deeper and you can see that the brunt of this deflation has been borne by truck tyres. Exports of passenger car tyres fell 15.6 per cent by value, with the value of commercial vehicle tyres down 40 per cent.

As far as passenger car tyres are concerned, imports of these products peaked at just under 17.9 million units in 2008 after double digit increases from most foreign manufacturers.

Table 1:- Russia’s Leading Passenger Car Tyre Importers 2007/2008 (Source: Discovery Research Group)

Manufacturer

Units imported – 2007

Units imported – 2008

Change

Continental

3,002,482

1,860,382

61%

Bridgestone

2,025,707

1,629,592

21.30%

Michelin

1,913,332

1,363,793

24.31%

Yokohama

1,603,235

1,080,000

48%

Goodyear

1,560,990

1,080,301

44.50%

Table 2:- Russia’s Leading Truck Tyre Importers 2007/2008 (Source: Discovery Research Group)

Manufacturer

Units imported – 2007

Units imported – 2008

Change

Michelin

381,054

416,015

10%

Bridgestone

195,357

214,520

9.00%

Goodyear

110,162

105,995

-3.80%

Aeolus

92,687

92,432

0%

Hangzhou Zhongce

11,652

69,899

602.00%

Most international premium tyre makers reported marked falls in imports in the first half of 2009.

Table 3:- Fastest fallers regarding tyre imports into Russia for first half of 2009, compared with the first half of 2008 (Source: Discovery Research Group)

Manufacturer

Change

Pirelli

        -93.6%

Nokian

-91.6%

Rosava

-75.3%

Michelin

-63.2%

Continental

-62.2%

Table 4:- However, imports of Japanese-produced tyres grew fast (Source: Discovery Research Group)

Manufacturer

Change

Yokohama

       +59.6%

Sumitomo

+10.2%

Bridgestone

+8.5%

Toyo

+3.2%

To put this into context, the data can be compared like-for-like with a June 2009 study (also conducted by Discovery) on the subject of Russian tyre imports and exports between 2007 and 2008. According to this study, 15,023,000 tyres of all kinds with a value totalling 945.93 million rubles (£19.773 million; 21.835 million euros; US$32.304 million) were imported into Russia in 2007. By 2008 imports had grown to 19,923,033 units, valued at 1.3795 billion rubles (£28.826 million; 31.826 million euros; US$47.104 million). In case you were wondering how the entire Russian tyre import market could average out at just over £1 a tyre, Discovery’s analysts point out that import values are, as a rule, understated. This is said to be because routinely dealers underdeclare prices during the import process.

With this statistical pinch of salt in mind, imports of passenger-car tyres are said to have grown from 13,283,828 units in 2007 to 17,891,312 units in 2008. During the same period Russian truck tyre volumes are said to have grown from 1,198,835 to 1,407,616 units.

Total tyre export volumes reduced from 9,321,646 units in 2007 to 7,782,687 in 2008 – the first signal of how much of an impact the global economic crises would have on the Russian market. However, in the same period the value of tyre exports actually increased from 636,65 million rubles (£13.3 million; 14.77 million euros; US$21.734 million) to 695,10 million (£13.712 million; 15.275 million euros; $22.568 million). According to the analysts this is most likely an increased mean tyre price in the customs declarations of exporters. Exports are said to have increased systematically during the first three quarters 2008, a trend which was also observed in 2007. Russian tyre exports typically peak in the forth quarter.

Passenger-car tyre exports, the largest segment by volume, fell 15.5 per cent in 2008.

During the same period truck tyre exports reportedly fell 45.1 per cent. In 2007. the volume of the export of last block exceeded a volume of the previous period in the independence from the category. In the fourth quarter 2008 g. the action of crisis already began to affect, by the way, not only the volume of export, but also on the volumes of the production of tires in Russia.

Table 5:- Tyre export volumes 2007, by category

Tyre type 1Q 2Q 3Q 4Q 2007
Passenger car

1,389,123

1,381,194

1,807,739

2,052,367

6,630,423

Light trucks 433,396 502,174 550,701 605,996 2,092,267
Trucks, buses, the minibuses 149 1728 3451 760 6088
Agricultural 126,670 169,563 120,921 121,430 538,584
Roadbuilding equipment 861 1242 1731 737 4571
Construction and industrial technology 6951 10622 6643 7493 31,709
Loader 38 76 128 1843 2085
Other 1489 6432 2111 5887 15,919
Total 1,958,677 2,073,031 2,493,425 2,796,513 9,321,646

Table 6:- Tyre export volumes 2008, by category

Tyre type 1Q 2Q 3Q 4Q 2007
Passenger car

1,230,839

1,263,365

1,714,669

1,448,129

5,657,002

Light trucks

321,617

405,235

524,537

287,815

1,539,204

Trucks, buses, the minibuses

241

 

50

484

775

Agricultural

157,112

162,581

147,908

66,862

534,463

Roadbuilding equipment

1919

1149

2698

954

6720

Construction and industrial technology

6095

7549

6879

9894

30,417

Loader

1940

1960

1864

711

6475

Other

2655

2212

2117

647

7631

Total

1,722,418

1,844,051

2,400,722

1,815,496

7,782,687

Nokian remains leading position in Russian passenger car tyre business

Despite the generally adverse economic environment, and cutting imports by over 90 per cent in the first half of 2009, Nokian Tyres’ most recent financial results show the company is weathering the storm and even outperforming some estimates. Perhaps more importantly, the company reported that it has maintained its leading position in the 40 million unit-strong (50 per cent winter tyres) Russian passenger car tyre market.

Nokian’s net sales for the first nine months of 2009 totalled 550.8 million euros (down 32.2 per cent on 813.2 million euros in January to September 2008). Meanwhile the company’s operating result amounted to 61.2 million euros in the period. According to the company, sales and operating result improved clearly in the third quarter. July to September operating profit fell 39 per cent compared with 43.7 million euros (£42.492 million; $64.6 million). Reuters reported that this figure beat all of the forecasts in its poll. During the same period, sales fell 28 per cent to 204 million, in line with expectations. Sales and operating margin is said to have improved, compared to previous quarters, due to pre-season deliveries of winter tyres, restocking of heavy tyres by OE customers, production restructuring and reduced raw material cost.

Commenting on the results, Kim Gran, Nokian president and CEO, was upbeat about the future: “Uncertainty in the market continues but the strong headwind has changed to a more stable breeze…The launch of our new winter tyre, Hakkapeliitta 7, has been a great success and has helped to maintain healthy prices and strengthen our market leader position on our core markets. Our market shares improved on all markets except in Russia where we maintained our market leader position.”

Despite Nokian’s consistent performance and generally successful Russian strategy, prior to the third quarter results’ presentation, analysts at Morgan Stanley warned that the company’s Russian exposure “skews risk-reward too far to the downside.” From the bankers’ point of view, the company’s average profit margins of 19 per cent between 2003 and 2008 are impressive. However, they also point of that with Russian sales contributing 46 per cent of sales between 2004 and 2008 “the company’s heavy reliance on Russia…exposes it to that market’s weak dynamics”.

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